Skip to main content

Advertisement

Advertisement

Getting a loan? Make sure your credit score is good

Few of us may think about our credit score except when we are applying for a loan. More than just affecting your loan and interest rate, your score can have an impact on other parts of your financial life — and even your job — so it is important to keep your credit score in good shape.

Your credit score is, very simply, a number that indicates the likelihood that you will pay back your loan, which banks use to decide whether to approve your loan application.

Your credit score is, very simply, a number that indicates the likelihood that you will pay back your loan, which banks use to decide whether to approve your loan application.

Follow TODAY on WhatsApp

 

Few of us may think about our credit score except when we are applying for a loan. More than just affecting your loan and interest rate, your score can have an impact on other parts of your financial life — and even your job — so it is important to keep your credit score in good shape.

Your credit score is, very simply, a number that indicates the likelihood that you will pay back your loan, which banks use to decide whether to approve your loan application.

Behind that simple number, though, is a more complex credit assessment.

In the past, bank employees used to analyse loan applications.

Now, banks have turned to automated analysis instead. That automation relies on algorithms which create a score based on data about you and your payment history.

In Singapore, much of the data used to calculate that score is kept in a credit report at the Credit Bureau Singapore (CBS).

The report includes information such as your personal profile, loans, payment history, default and bankruptcy records, closed loan accounts, credit limits and the amounts you owe.

CBS uses its data to calculate a credit score, using factors such as your credit utilisation pattern, late payments, account history, recent applications for loans and enquiries by lenders.

Many banks use even more complete information, including both the details on your loan application form and the data at CBS, to develop their own score.

Banks then use their score in deciding whether to give you a loan.

Very simply, you are unlikely to be able to get a mortgage, credit card or other types of loan if you don't have a good enough score.

If you haven't paid your loans on time or you have borrowed too much, for instance, the bank may decide that you don't have the character or capacity to pay back your loan and decline your application.

The impact can go beyond getting a loan. Employers and insurance companies may use your score to assess you, too.

As the National Trades Union Congress (NTUC) explains it, "employers tend to pull credit reports to glean the most accurate identifying details of a candidate to assess their identity, integrity and credentials, as a person's credit history can be a good indicator of their competency, behaviour and financial soundness".

IMPROVING YOUR CREDIT SCORE

While you may not need a loan now, at some point you may want a mortgage to buy a home, a loan to buy a car, a credit card for your spending or another type of loan.

Since getting those loans depends on your credit score, it is important to manage your finances well.

The most important step is to pay your bills on time. Making payments late or, worse, not repaying your loans, has a very negative impact on your credit score.

Using the automated payment facility Giro for automatic payments every month can be an easy way to pay on time.

Beyond just paying promptly, you should also make sure you don't get too many loans or credit cards, and don't borrow too much.

If banks see that you have borrowed a lot or have a huge amount available that you can borrow using credit cards and personal loans, they may be reluctant to loan you more, for fear that you won't be able to pay it all back.

ACCURACY OF CREDIT HISTORY

It is also essential to make sure that your credit history is accurate.

While there is little information available here on whether the data at CBS is accurate, a recent study by the Federal Trade Commission in the United States showed that 5 per cent of consumers had errors in their credit report that were so severe that they pay higher interest rates on loans.

On the other hand, 20 per cent of the consumers who corrected those mistakes increased their scores so much that they were able to get another loan.

To get a copy of your credit report here, so you can review it and correct it if it is wrong, simply go to the CBS website at www.creditbureau.com.sg and request a copy.

You may get a copy of your credit report for free if you recently applied for a loan, or get one for $6.42 otherwise.

CBS itself suggests 10 steps for improving your credit score, including paying your bills on time, reducing your debts, charging less on your credit cards and holding fewer credit cards.

Interestingly, just knowing that you can check your credit score might make you a better borrower and lead to better financial decisions.

A recent study led by New York University's assistant professor Tatiana Homonoff showed that borrowers who received communications about their ability to view their score had fewer past due accounts, had higher scores and were less likely to overestimate their own score.

Whether it is to get a loan or even a new job, your credit score is more important than you may realise.

Paying your loans on time and reviewing a copy of your credit report regularly are simple steps that may do more than you expect to keep your financial life in good shape.

Read more of the latest in

Advertisement

Advertisement

Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.